The 8020 Initiative
Friends and fellow Ludwigs,
The eternal symphony of change and innovation is relentless in this crazy DeFi space. With thousands of brilliant minds thinking simultaneously, fresh new tech is created, and collaboration thrives. A hive of problem-solving prowess hums away.
Of course, with knowledge comes progress, and even once-great solutions can become outdated and cumbersome. What was once considered modern and exciting begins to wear thin and in these times it’s important to recognise when to pivot, cast out the old, and embrace the new.
Today our journey leads us to the forefront of efficient and streamlined protocol governance technology: the 8020 initiative. To truly appreciate the new, we must first explore the old.
Single Staking
The majority of DeFi protocols implement a native token single-sided staking mechanism. Governance tokens are acquired and staked in return for governance voting power and additional supplied incentives. At first glance, the mechanism looks suitable, but look a little closer and the cracks begin to show.
While incentivising staking successfully increases governance participation, it effectively reduces the circulating supply available for swaps as more liquidity is staked.
As a result, a smaller portion of capital is supplied to liquidity pools and this lack of liquidity leads to a number of issues:
- Increased slippage
- Inability to facilitate larger trades
- Higher price volatility for the underlying tokens
To address these challenges and encourage liquidity supply, protocols often resort to providing additional incentives for their token, not only to multiple liquidity pools but also across multiple decentralised exchanges (DEXs). Entangling themselves in an inefficient, expensive, and complicated incentive program.
What’s needed is a solution that promotes governance participation but also offers an efficient incentive program solution whilst avoiding capital lockup.
Sounds like a dream hey… Well say hello to the 8020 initiative.
8020 Overview
This is a solution made possible by Balancer’s Weighted technology. By leveraging weighted math, liquidity pools can be configured with up to 8 tokens in any desired weighting. 8020 refers to a two-asset pool with 80% of one asset and 20% of another.
So what exactly does this have to do with governance?
The 8020 initiative proposes using an 8020 pool BPT token as the governance token instead of a single token. With a pool configuration of 80% of the protocol’s native token paired with their chains base token or a highly liquid stablecoin such as USDT or USDC.
This model hosts a range of benefits including:
- Deep Liquidity
- Asymmetric upside and reduced impermanent loss (IL)
- Efficient incentive programs
- Hedging and price appreciation
What’s more, utilising the BPT as the governance token unlocks a new realm of possibilities for additional mechanics. Examples of these include Balancer’s ve8020 governance or Beethoven X’s maturity-adjusted model, but more on those later.
For now, let’s take a deep dive into some of the benefits of 8020.
Deep Liquidity
As we mentioned before, single-sided staking leads to large quantities of a protocol’s token being removed from the circulating supply. This single-staked supply is dedicated to securing governance power, and when combined with a vote escrowed model, it can result in substantial liquidity being removed from circulation for extended periods, sometimes spanning multiple years!
Harnessing a liquidity pool BPT as the governance token, the 8020 model circumnavigates this issue. Instead of staking the token itself, users stake the pool BPT, allowing the underlying staked tokens to actively participate in swaps. For the first time in governance history, as the sum of staked tokens grows, the available trading liquidity increases rather than decreases.
And of course, deep liquidity means:
- Reduced slippage
- Ability to facilitate large trades
- Lower price volatility
By addressing the limitations of traditional single-sided staking, the 8020 model fosters an ecosystem where liquidity thrives, enabling smoother and more efficient trading experiences for users.
For reference, at the time of writing, Balancers 8020 governance pool has a TVL of over $208M, if that’s not deep liquidity, we don’t know what is! Had they implemented the single-sided staking model much of this would be locked away. Check it out for yourself here.
Asymmetric Upside and Reduced IL
Balancer’s weighted technology unlocks unbound composability in pools and an 80/20 split represents the perfect middle ground for native staked tokens.
With 80% of supplied tokens being the protocol token, this model offers asymmetric upside. Meaning the upside potential is far greater for the native token as opposed to the base token.
A 50/50 pool is generally avoided for this purpose as it offers limited exposure to the native token and poses a much larger IL risk should the native token explode in price.
While there is still some inherent risk of impermanent loss, as illustrated in the figure below, the 80/20 split offers substantially reduced exposure to IL, while retaining the benefits of deep liquidity and exposure to the base token.
By striking the right balance between token composition, the 8020 model maximises exposure to the underlying native token while effectively mitigating the risk of impermanent loss.
To summarise, 8020 liquidity providers enjoy the advantages of deep liquidity, asymmetric exposure to the base token, and minimized impermanent loss.
Hedging and Price Appreciation
Whilst an 80/20 split helps to minimise the risk of IL it also provides users with exposure to the base asset, acting as a hedge. This exposure becomes significant in situations where the price of the base asset experiences a rapid increase or if the price of the native asset declines. In such scenarios, arbitrageurs are incentivized to rebalance the pool.
In layman’s terms, this means that if the base token significantly increases the native token will appreciate alongside it due to the correlation of the tokens. This correlation allows users to benefit from the potential upside of both tokens.
In 2021, Aave opted to implement a Balancer 8020 pool BPT into its safety module. Increasing exposure to ETH whilst also acting as a safety backstop for Aave liquidity pools should they face cascading liquidations. An exemplary display of the 8020 model, be sure to check out the full story.
Efficient Incentive Programs
With the need to facilitate swaps, the traditional single-sided model necessitates incentives for both the staking pool and other liquidity pools. By integrating the governance token into an 80/20 liquidity pool, the need to split and direct incentives to other DEXs is eliminated.
In essence, the 8020 model consolidates these incentives, removing the need to fractionalize liquidity across multiple markets. As a result token supply is concentrated in one primary pool, vastly reducing slippage and offering a simpler, more cost-effective incentivisation program.
But that’s not all, by utilising a liquidity pool BPT for governance an additional stream of incentives automatically presents itself — Swap Fees.
Every time a trade takes place on the protocol, a swap fee is denominated in the pool’s respective BPT. Each pool has its own swap fee uniquely set based on the underlying assets and AMM logic being used. A portion of these fees flow to liquidity providers as an incentive for providing liquidity.
Every time a swap is executed in a liquidity pool, swap fees are collected and automatically flow to the liquidity providers. This creates an additional source of incentives, empowering users to grow their positions while actively participating in the governance process.
The integration of swap fees as an inherent incentive mechanism within the 8020 model strengthens the overall ecosystem, promoting liquidity provision, and enabling users to reap rewards for their active engagement.
Take Radiant Capital as an example. After adopting the 8020 model and drawing in a TVL of almost $43M, the pool facilitated 44,046 swaps and generated $644,744 in swap fees in the first 28 days. To date, Liquidity Providers have earned an additional $751,529 that would never have been possible with a single-staked model. Check out the full case study below.
8020 Evolution
The realm of innovation within the 8020 governance model extends far beyond its initial implementation though. By employing a pool BPT as the governance token, a multitude of possibilities opens up, paving the way for various additional mechanics. Let’s explore two examples: ve8020 and ma8020.
ve8020
ve8020 is a vote-escrow vesting system created and implemented by Balancer which draws from Curve’s veCRV mechanism. Users lock their 80/20 BAL/WETH BPT in exchange for the governance token, veBAL. The duration of locking can range from one week to one year, with the amount of veBAL received directly proportional to the number of locked BPT tokens and the locking period duration.
Why innovate? Curve’s ve model has seen widespread adoption across the industry but is it really the most effective way to facilitate governance?
One of the major drawbacks to single-sided governance staking is the reduction in token liquidity across the market. As users lock their governance positions that liquidity is effectively made redundant for trading.
ve8020 has the opposite effect. Every time users lock into governance positions trade liquidity actually increases! Through the innovation of Balancer’s weighted pools, the more liquidity that flows into an 8020 governance position the deeper the liquidity becomes for the underlying tokens.
But this isn’t the only option…
ma8020
At Beethoven X, we opted to go down a different path. Rather than rewarding token locking, we incentivize the growth of positions over time, with rewards and voting power increasing with maturity.
Or as we like to call it… A maturity-adjusted position.
Maturity is broken down into various levels, each of which corresponds to different incentive and voting power reward distributions. Once the highest maturity level is achieved, users unlock the maximum liquidity mining rewards and governance power.
Users simply stake their 80/20 BEETS/FTM BPTs and, in the place of receipt tokens, are issued an evolving financial NFT known as a relic. This relic tracks position maturity and even unlocks opportunities such as secondary markets. Safeguard the relic and witness its growth over time!
This is only a very brief rundown, for the ultimate deep-dive check out the article below.
Outro
Wow. That was a lot to take in!
The bottom line is, the 8020 initiative represents a significant leap forward in protocol governance technology. Harnessing Balancers’ wizardry and utilising a pool BPT as a governance token addresses many of the issues faced in the traditional single-sided staking model. True innovation.
What’s more, a new frontier has been unlocked with pioneering mechanics such as ve8020 and ma8020 paving the way! Balancer is constantly pushing the boundaries of what is truly possible and we’re here to usher in a new era of efficient, streamlined, and optimised governance.
With LOVE,
BEET X.
